Japan's Welfare Ministry Proposes Means Testing State Pensions

At some point, presumably next year, after this year’s election, the U.S. political process will begin to seriously address entitlement reform. But I could be optimistic. Japan shows how long in a democracy reform of an unaffordable and generationally unjust old age welfare system can resist and forestall reform, even as a society’s demographics and state finances approach collapse.

We might expect Japan, with a homogenous society and communal culture, to have an easier time agreeing on the right reform formula, than the multiracial and societally more complex U.S. Turns out the opposite may be true. In Japan, on almost all reform issues, what is required by political decision-makers is “consensus,” meaning agreement, or at least acquiesence, of everyone involved. This requirement gives inordinate power to hold-outs and opponents with vested interests in the status quo. Majority rule—perhaps the simplest notion of democratic government—simply does not work and does not describe the political process in Japan.

So how does or can reform come about? Most vividly since the Koizumi government, we are finding out under PM Noda who has vowed not to continue to “kick the can down the road” on reforms.

Reform plans have traditionally come from the ostensibly neutral—but actually compromised, if not captive—government bureaucracy, i.e., the ministries involved, and the role of politicians was to pass the plans into law, pocketing money from the vested interests for their efforts. The system seemed to serve everyone well, particularly the vested interests. But the “reforms” were rarely if ever such as to open up sectors to competition or to achieve effective economies. Rather, they strengthened defenses against real reform.

The Democratic Party of Japan (DPJ) came to office in 2009 promising to prise policy making from the bureaucracy so that policy would aim to benefit the people and country as a whole, rather than vested interests. Easy to say, and difficult to do, not least because of neither Japanese parties nor individual politicians—with few exceptions—seem to possess clear policy goals, or are able to articulate them.

It is ironic, and telling, that the reform proposals now being debated and which are likely to be adopted, have come in the traditional way—from the bureaucracy. Plus ca change…

On February 14 the Ministry of Health, Labor, and Welfare (MHLW) formally proposed to the quasi-government committee interfacing with the Diet a “means testing” fiscal reform plan for Japan’s national pension system (equivalent to U.S. Social Security). The plan calls for limiting maximum benefits to persons with annual incomes of JPY 8,500,000 (USD 110,000) or less. Above this income level, up to an annual income of JPY 13,000,000 (USD 169,000) benefits would be gradually reduced by half.

As for funding, MHLW not surprisingly endorses the Noda government proposal (which also came from the bureaucracy) to raise the consumption tax from the current 5 percent to 10 percent in two steps by October 2015, calling for passage of enabling legislation in the current Diet session.

Boldly, the MHLW reform proposes that the means testing and cuts in benefit payments apply not just to future pension recipients, but also to current ones. An estimated 243,000 current recipients would be affected.

If something must change, it will change. Japan—notwithstanding its consensus-demanding political culture—seems serious about entitlement reform. Can we say the same about the U.S.?